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Deflation Beckons - Is It Time for Accountants to Reduce Their Prices?

21st Jan 2015
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As deflation becomes an economic reality, the inevitable urge to increase charge out rates at every opportunity might soon be replaced by a need for different approach.

It is unlikely that anybody reading this column can remember even the thought that deflation might occur, let alone seeing it in practice.

Rampant inflation has been the norm for decades and many will recall the days when even in Britain it was well into double figures. In countries like Argentina prices could double almost overnight.

In such a climate, we were used to increasing charge out rates with dizzying regularity. While clients would generally be unenthusiastic most were willing to take the increases on the chin, frequently because they were doing exactly the same to their own customers.

As oil prices continue their freefall my own economist of choice, Robert Peston on Radio 4, has had to explain to Britain in words of one syllable how deflation works.

If people believe that prices are going to be lower next week or next month than this, they will delay purchases. Already, retailers and consumers are facing up to the rollercoaster thrills of Black Friday and Boxing Day sales that many of the latter await with glee.

Now, trying to make a sale in the first half of November or even in the lead up to Christmas is that much harder.

While many of the services which accountants deliver (it would be crude to use the word “sell”) such as audits are compulsory and cannot be deferred, others, such as the implementation of an employee share incentive arrangement, are at least a little flexible.

It will be interesting to see whether some clients actually begin to follow the economic rationale of this brave new world of deflation in future.

More practically, we can expect additional pressure to peg or reduce prices over the coming months.

This could have a number of consequences. First, despite the economic upturn it is likely that some accountants will seek to minimise their own costs. The obvious way of doing this is to freeze the pay of their employees or reduce pay rises.

Secondly, it would only take one enterprising firm to announce a reduction in charge out rates for everybody else feel an obligation to follow suit.

While this might not happen, we are all probably familiar with the concept of lowballing where charge out rates go out of the window in an attempt to win work. There is at least a possibility that bidding at very low levels to win or maintain clients could be even more prevalent in 2015.

One fears that many readers will be laughing at what they see as a satirical article and checking whether they have slept for a couple of months and awoken on 1 April. The idea that the most economically savvy profession of them all would voluntarily seek to charge less than a client can painfully part with seems like a joke.

However, it will be interesting to see whether that view changes if we really do enter the unknown territory that deflation could create.

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Replies (8)

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By Alan Davies
21st Jan 2015 09:49

Consumer v. business inflation

Interesting to hear Robert Peston described as an economist - he's usually just called a reporter (or economics editor on the BBC news).

In terms of deflation I would argue this has already happened in the business world - commercial rents have fallen and wages have remained steady at best since the beginning of the recession back in 2008.  Output prices stayed broadly the same though as supply constricted at the same rate as demand.

What is happening now is that consumer deflation is a possibility.  Oil dependent output prices are falling and its creating (mostly) an illusion that everything else is getting cheaper too.  I'd suggest that the depression of the oil price will be relatively short term though, I can't see these types of discussions happening next year. 

So I guess my point is if you were to lower your prices you should already have done it when your 2 biggest costs (office space & wages) were low and you were able to.  Now both wages and commercial rents are showing signs off inflation.   

 

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Replying to Wilson Philips:
By k743snx
22nd Jan 2015 12:58

Wage levels

Already we have politicians constantly talking about the "living wage" as opposed to the "minimum wage". How long I wonder before the minimum wage is increased to the living wage?  That, I suggest, depends which party wins the election in May. 

Shush - you might be giving Mr Sweetman ideas for his next blog on the Evils Of Capitalism  :0(

In fact, "living wage" has joined other words or phrases like "working class" "middle class" "rich" and "poor" which politicians spout frequently, but when pressed, have difficulty in defining.

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Replying to Justin Bryant:
By k743snx
23rd Jan 2015 13:27

wages

Already we have politicians constantly talking about the "living wage" as opposed to the "minimum wage". How long I wonder before the minimum wage is increased to the living wage?  That, I suggest, depends which party wins the election in May. 

Maybe sooner than we dare think.......

http://www.expressandstar.com/business/uk-money/2015/01/23/living-wage-p...

 

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By User deleted
22nd Jan 2015 12:26

I don't think ...

... many accountants have been ramping up prices year on year for some time now!

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@enanen
By enanen
23rd Jan 2015 12:28

A Race to the Bottom...

Cutting each others throats in order to win business is not a viable solution to the demands of clients wishing to optimize value. Give the client the option to do more themselves but warn them of the dangers if they do not have the knowledge. There will always be those looking for the cheapest price without consideration of result or risk. One should not try and win every client as you will end up a busy fool. Also the ones who demand a bargain basement price that you bend to will be your most time consuming and annoying. We have all had them. Of course there are also the diy ones who post on accountingweb forum looking for free advice. Tell them nowt. They will probably try and sue you for bad advice when it all falls apart. Feeling cynical today.

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By Charlie Carne
23rd Jan 2015 12:31

Moonlighting 1

If we have to reduce our prices, then Rachael Power's article today offers the more entrepreneurial of us a novel way to recapture some additional income.

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By paddy55
24th Jan 2015 02:50

Deflation

PO says "if people believe that prices are going to be lower next week or next month than this, they will delay purchases".

Conversely, If people believe that prices are going to be higher next week or next month than this, they will bring forward purchases?

I doubt this. In both cases, you will be buying with deflated or inflated currency in the subsequent period.

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By LuKosro
24th Jan 2015 15:24

Yeah, but

Some other economists would also talk in this context about asymmetric information, market concentration across market segments, sticky prices, moral hazards, freeloaders, different methods of measuring the general increase in prices, elasticity of demand / supply / price, trickle down economics vs quantitative easing, inflationary / deflationary expectations, market concentration, PESTEL forces on the market, competition, etc.

"As deflation becomes an economic reality...". Deflation will most likely not become an economic reality because it is incompatible with the fractional-reserve banking system. Short term deflation is possible as measured in CPI, but it wouldn`t necessarily translate into lower prices over the board due to the issues outlined above. 

 

 

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